IBM’s India Strategy

Last week’s Economist had an article called Hungry Tiger, Dancing Elephant. It traces IBM’s globalization efforts, and especially analyzes their India strategy.

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(IBM CEO) Mr Palmisano announced that IBM would invest a further $6 billion in India over the coming three years, up from $2 billion in the previous three. That sum does not include any acquisitions of Indian companies. (It has already struck some big deals, notably buying Daksh, an Indian outsourcing company, in 2004.) Some locals wondered how IBM would manage to spend all that money. But booming demand is pulling wages higher in India and costly training is now needed to lure workers being courted by other companies.

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If you read this article, it would become readily obvious that IBM intends to acquire a great deal more in India during the next 3 years. It has already acquired a number of enterprise software companies in the US over the last few years, and has started positioning as a major software vendor. On the Services side, beyong PWC and Daksh, however, it hasn’t yet acquired much. So, let’s explore what they are likely to acquire, and why.

The Global Professional Services sector is organizing itself very much like the multi-tiered supply chain of the Auto industry, where ONLY Tier-1 suppliers have direct relationships with the Manufacturer. In this case, global multinationals are starting to decide upon preferred Tier-1 Outsourcing Vendors. These Tier-1 vendors will then manage the rest of the outsourcing supply chain.

Let’s take an example. Say, P&G wants to use IBM Global Services as their Tier-1 vendor, and beyond the standard services (data center management, IT management, PLM integration, HR Services, etc.) also needs a certain nichy service of Industrial Design for its entire personal care productline. IBM doesn’t have this expertise, but a small industrial design services firm in Ahmedabad, India, because of its proximity to the National Institute of Design (NID), does. IBM would then sub-contract to this firm. Likewise, it would manage a large portfolio of specialized services vendors, all of which roll up to P&G as the end-client.

It turns out, that when global MNCs choose their Tier-1 services vendors, they still prefer the IBMs and the Accentures, over Infosys, Wipro, or Satyam, although the latter are trying their best to position themselves on an equal footing. [HCL has smartly gone around this race, and has positioned itself as the preferred provider to the mid-market MNCs.]

With this as the backdrop, it is quite possible, that IBM would systematically acquire certain IT services firms that fulfill niche functions that enough of its customers want. For example, it could go after companies like AppLabs (Software Testing), Persistent & Symphony (Outsourced Software Product Development, OPD), etc. Persistent has 2700 people, and Symphony about 3000. Symphony counts among its customers Autodesk, Oracle, Hyperion, BMC Software, and Texas Instruments. Persistent has Microsoft, Oracle, Blue Shield. AppLabs’ bluechip customers include Cisco, SUN, SAP, American Airlines and Microsoft.

I am sure there are millions and zillions of other services companies in India that I don’t know anything about. IBM, however, probably does. I would not be surprised at all to see some of these get acquired in short order.

Hiring 10,000 people in one year may be much tougher in today’s India than buying 3 companies that together stitch up a 10,000 person quilt!